Intelligent Investor

Cabonne's cruel crush

This ambitious company has cost investors dearly. It's a belated SELL.

Back in 1999 the prospectus of Cabonne, an owner and manager of vineyards, told of a great story. The glossy document had all kinds of wonderful diagrams, photographs, facts and figures. Rosy financial projections predicted a profit for the 2000 financial year of $6.5m. Although the company only managed to achieve $5.7m, others have done far worse. So why has the share price nosedived by more than 63% since listing at $1.00?

Unbelievably bad

The result for 2001 was unbelievably bad, a loss of $59.1m. How could this be? Well, we've pointed out Cabonne's complicated structure in the past. And it now looks as though it was too complicated for management as well.

As any kid who's run a lemonade stand knows, if you get less money over the counter than you pay out, you'll eventually have to pack up your stand and have a think about your business career.

Cabonne's accounting revenues do not match up with its actual cashflow. Although it posted accounting profits over the past two years, the company has suffered quite severe negative cashflows. Its biggest earner is management fees from farmers to whom it subleases land packages.

If the farm project (managed by Cabonne) does not produce enough income to pay the management fee, then Cabonne will lend the farmer the shortfall.

This means that revenue which hasn't been received can be recorded for accounting purposes. Fancy eh?

Cashflow squeeze

This situation squeezed the company's cashflow. Cabonne was incurring the expenses involved in the day-to-day management of the farms but the revenue from management fees was not coming through the door.

This was because the farms were not making enough money to cover the management fees.

That meant Cabonne had to lend the shortfall to the farmers. However, there was no money to lend and the company itself had to borrow to fund the loans. This saw the net debt-to-equity ratio blow out from zero after listing to 71% in the latest annual report.

Cabonne has become a de facto finance company and a very different business to the one most shareholders probably believed they were in. There were warnings in the prospectus for studious readers.

A two-line warning on page 37 outlined a key assumption that was made about the company's future performance: 'No farmers' loans are required to be written-off as bad debts.' Unfortunately, this year Cabonne is writing off $63m of those loans.

Accountants caveat

A more obvious caveat came from the Investigating Accountant's Report. Accountants Deloitte Touche Tohmatsu made special mention of the fact that the loans made to farmers 'are of a non-recourse nature.' So the repayment of the loans was entirely dependent on the farms making a good return. They haven't yet.

Obviously no one at Cabonne ran a lemonade stand as a child. How could a group of professional businessmen preside over such a parlous state of affairs?

Well, as we mentioned in issue 58, the group's chairman Peter Lucas is no stranger to corporate debacles. Lucas was MD of Bond Corporation for two and a half years in the late eighties. He's also chairman of Australian Innovation Limited, a thinly traded, unprofitable investment company.

In issue 79 (Accumulate - $0.66) we were hopeful that the company's business model might work out. After examining the latest financial results, we're now urging subscribers to get rid of this stock.

Perhaps lessons have been learnt and the future will be bright. The company operates in a booming industry after all. However, we think that's very unlikely. With such a woeful record and worrying accounting practices, SELL.


Join the Conversation...

There are comments posted so far.


Related Articles